India Strategy: 44 Annual Reports, 5 switch trades

Out of the 44 ARAs that analysts of IIFL Capital Services wrote for FY23, the key themes are: 1) Weak consumption demand and sluggish volume growth in the consumer sector; but strong industrial demand led by the government’s infra focus, and newer opportunities from RE, 5G, warehousing, power shortage & data centres. 2) Weakness in export-dependent sectors such as IT, Chemicals, US-focused Pharma, etc. 3) Margin hit due to raw-material cost spike – this has begun to reverse and margins will improve. 4) Strong companies maintaining investment intensity in difficult times, thereby strengthening positions.

 Areas of sunshine…: 

Within Pharma, the India-focused names impressed given the better growth, higher margins, lower working capital (WC) and superior return metrics. With such a comparison of fundamentals between markets, analysts of IIFL Capital Services prefer Alkem with its US withdrawal to IPCA with new US foray. Telecom shone with the data-usage-driven ARPU uplift continuing, capex peaking, improving FCF and return profiles – Bharti is the top pick. Gas Utilities witnessed strong return & FCF profiles unaffected by fluctuating input prices and Power Utilities had tailwinds from impending power shortage. Industrial goods segments within Polycab (90% revenue share), Havells, Blue Star and Voltas did well; but B2C struggled – pricing environment stays weak. TI’s strong core performance is funding its newer growth segments of EV 3W, Trucks, Tractors, Electronics mfg, Medical devices & CDMO. 

…and cloudy outlook:

For Chemicals, pricing tailwinds are behind and ongoing large capex plans are getting deferred, due to weak international macro. Analysts of IIFL Capital Services think that the weakness will persist given the weak performance of base metal prices in the recent months – SRF is the top pick. For IT, supply chain issues are behind but uncertain global slowdown and AI will haunt companies. In FY24, strong earnings growth for the domestic tyre-makers is already priced in. Once the margins peak, earnings growth will become lacklustre (FY25 onwards), mirroring sub10% revenue growth. Switch trades & stock recommendations: Mankind & Sun over Dr Reddy’s & Cipla, Blue Star over Voltas, TCS over INFY and Balkrishna over other Tyre stocks — are the recommended switch trades. Analysts of IIFL Capital Services also like Bharti and are negative on Page, DMart, Dr Reddy’s, Wipro, Atul & Navin Fluorine.